Why We Love Leases

A perfect alignment of market forces in recent months has made leasing a car more financially advantageous and appealing to a wider range of consumers.

“High resale values and low interest rates are contributing to some of the most attractive lease deals we’ve seen in years,” says Jesse Toprak, vice president for the online valuation/car-buying service truecar.com. That’s because lease payments are largely based on a vehicle’s transaction price minus its projected resale value at the end of the lease term (also called the residual value) over a given term, financed at the going interest rate.

Leasing now accounts for 21 percent of all new-vehicle transactions, according to edmunds.com, up from around 12 percent in 2009 when auto sales crashed and some automakers got out of the leasing business temporarily. This figure is estimated to rise to as high as 25 to 30 percent in the coming years.

Automakers love leasing because it brings new customers back to dealerships with clocklike regularity and helps dealers maintain an inventory of recent-model used cars. While leasing traditionally has been most prevalent among luxury brands, automakers in all market segments now push cut-rate leases aggressively on a wider range of models, including some of the smallest and least expensive cars on the lot. Not surprisingly, leasing is becoming more popular among what are traditionally the most cost-conscious consumers – retirees on fixed incomes and those in the 18- to 24-year-old age bracket working low-paying jobs and/or saddled with student loans.

Compact cars are now being offered with monthly payments as little as $159 a month, with midsize cars being leased for well under $200 a month, with down payments around $2,000 and $2,500, respectively. By comparison, in 2009 that $159 monthly payment might have been closer to $200 and the down payment required might have been as high as $3,000, according to Alec Gutierrez, manager of vehicle valuation for Kelley Blue Book.

While, according to KBB, typical lease terms and mileage limits remain steady at 36 to 39 months and 12,000 to 15,000 miles, respectively, some automakers are cutting corners to make their leasing offers more attractive. “We’re beginning to see more advertised deals for 24-month leases and in some cases with lower mileage limits at 10,000 miles or less to help offer a lower monthly payment,” says Gutierrez. Automakers can charge less with such terms because newer vehicles with fewer miles are worth more and require less reconditioning when they’re turned back in at the end of a lease.

There’s little to be risked by entering into a shorter-term lease, however experts warn that consumers should pay strict attention to the mileage limits allowed. Those exceeding the stated limit will find the cost to cover the extra miles at the end of the lease to be prohibitive. At 15 to 30 cents per mile, driving a car for an additional 5,000 miles over the stated limit can cost a consumer an extra $750 to $1,500 at the end of the lease.

Those who worry they might exceed the stated annual mileage can purchase additional miles up front at a discounted rate or may be able simply to negotiate a lease that carries a higher mileage limit in the first place.

As always, those being lured into dealers’ showrooms by the promotion of an attractive monthly payment of a cut-late lease should be mindful that, as with any financial deal, they must read the fine print and fully understand each of the terms that make up a lease agreement. “Leasing is right for some people, but they need to go into the arrangement with their eyes wide open,” says Gail Cunningham with the National Foundation for Credit Counseling.